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Wednesday, June 13, 2012

As suggested
by the Oil ministry, government is mulling over hiking the excise duty on
diesel cars.

As the
difference between diesel and petrol prices is around Rs. 30, more and more
people are rushing for the diesel variants.
The stocks of M&M, Tata motors and Maruti Suzuki were down by 1.84%,
2.31% and 3.31 % respectively.

For small
cars proposed excise duty could be as high as Rs. 1.7 lakh while for big cars
it might be Rs. 2.5 lakh. Small cars fall under Rs. 6 lakh and if excise hike
is implemented then the rates will be around 25-28 %.

In India,
around 15 % of diesel is consumed by the privately owned diesel cars. As raising
diesel prices will result in higher headline inflation, going for the excise
hike seems suitable for the government.

S&P,
one of the top global rating agencies, has already threatened to downgrade
India’s investment rating for failing to implement the policy reforms.

This step could be detrimental when IIP
manufacturing growth is hovering around zero-level and Indian industries are on
the back foot owing to the higher inflation regime.

This shall only discourage the new sales but old
diesel cars shall continue to avail the subsidized diesel. Auto companies which
have subscribed heavy loans for raising diesel car-manufacturing setup shall be
affected on the profitability front and thus affecting their loan
repayment ability.

Banking
sector which has funded the auto industries for the above-mentioned setup shall
face the higher risk of CDR (corporate debt restructuring).

What is the right solution?

Raising
the price of diesel by Rs. 1 only could fetch the government around Rs. 7800
crore per year while this excise hike shall fetch at the most Rs.6000 crore (considering
possible sales decline after the hike) that too endangering the economy.